A limited impact from the Catalan referendum

Market analysis - 10/6/2017

This week’s headline event was the political crisis following the Catalan referendum. Following violence during the vote and then the Spanish king’s uncompromising television address, all eyes turned to the separatists. The big question is whether they will go ahead and proclaim independence.

In his own TV address, the president of the Catalan government, Carles Puigdemont, struck a more measured note and rumours suggested that the declaration, officially scheduled for October 9, was not at all a done deal. The situation had a limited effect on markets. The spread between the German Bund and Spain’s government bonds widened by 15bp and the IBEX lost 2% over the period but other major European equity indices still managed to advance even if they underperformed Wall Street. We are keeping a close eye on political developments in Spain which have turned out to be riskier than expected. But the situation has not undermined our asset allocation choices and we remain upbeat on European equities.

Elsewhere, economic data were generally encouraging. Data in the US has been temporarily disrupted by the recent hurricanes and is thus less reliable. For example, car sales rose sharply in September following serious damage to cars in storm-affected areas. In this recovery environment, the ECB’s minutes from its monetary policy committee only confirmed that tapering would almost certainly be announced on October 26. The only question mark is over the possible technical details. The US dollar recovered and investors have started to wonder about looming fiscal reform in the US even if they remain sceptical. Sterling suffered a sharp fall due to Theresa May’s increasingly fragile position which has aggravated poor visibility in the middle of Brexit talks. 

  European equities

European markets edged higher over the week. Following last Sunday’s referendum in Catalonia, a Spanish court eventually suspended the Catalan parliament’s session on October 9 which was supposed to declare independence. Meanwhile, Caixabank, Catalan’s biggest bank, and Sabadell, Spain’s fifth-largest banking group, threatened to move their headquarters from Barcelona. The referendum had an initial impact on 10-year bond rates but this was followed by 3 days in a row of rising prices.

Spanish stocks, led by banks, rallied as did the rest of the eurozone sector. Italian banks, however, suffered from rising Italian CDS spreads and the ECB’s announcement that it was to toughen up guidance on provisioning for non-performing loans. 

In M&A, Atos hit the front page. After unveiling its acquisition of Siemens Convergence Creators (CVC), the group said it had bought 3 healthcare consultants in the US, a good move in a profitable and fast-growing sector. Elsewhere, Worldline said it had paid €89m for Indian payment platform MRL PosNet which manages transactions for 18 Indian banks and is growing fast.

Worldline also raised its 2017-19 objectives, the result of 3 good trading years and growth through recent acquisitions. Natixis said it had paid about A$155m for a majority stake in Investors Mutual Limited (IML), its first big acquisition in Australian asset management. Renault’s 2022 plan is aiming at a 7% operating margin by that year. The previous 5% target is now a floor thanks to new costs savings and a strong rise in international sales.  

  US equities

Equity indices had another up week with the S&P and Nasdaq both adding 1.3% and hitting record levels. 

Sentiment was helped by excellent economic data and hopes of fiscal reform in the near future. Manufacturing ISM for September hit 60.8, its highest level since 1987. Note that new orders jumped to 65.4, up from 60.3 in August. Non-manufacturing ISM came in a 59.8, its best since 2005. Meanwhile, comments from the San Francisco Fed chair, John Williams, fuelled speculation on future rate hikes. Williams, who is seen as a defender of accommodating monetary policy, said further rate rises were justified even without higher inflation. Meanwhile, Donald Trump received a short list of candidates for Janet Yellen’s position which comes up for renewal in February 2018. The list includes Kevin Warsh who criticised the Fed for launching its QE programme on the grounds that the bank was overstepping its mandate. Jerome Powell, a sitting Fed member in tune with Janet Yellen’s ideas, is also on the list. Yellen herself is still in the race but appears to be out of favour with the president.

In company news, Ford said it wanted to save $14bn by 2022 and focus on higher margin big cars while accelerating production of electric and driverless cars. The group has set aside $4.5bn for the development of electric cars. The Food and Drug Administration has given its green light to Mylan to market Teva’s Copaxone. General Electric completed the $3.4bn sale of its GE Water division to France’s Suez.

Reacting to Amazon’s offensive in fresh food deliveries, Walmart acquired Parcel, a start-up specialised in rapid deliveries. 

Financials (+2.2%), commodities (+2.1%) and consumer cyclicals (+2%) led gains over the week on upbeat macroeconomic data. Consumer staples and utilities were relatively weak. 

  Japanese equities

Over the week, the TOPIX gained 0.5% while the Nikkei 225 hit a two-year high on improved investor sentiment as Wall Street advanced on strong US economic indicators. But Japanese stocks then hovered between positive and negative territory with some stocks seeing profit taking from domestic institutionals investors’ while buying was encouraged by brisk US economic conditions. Upside was capped by uncertainty over North Korea and the Yen which stopped falling against US Dollar.

On the political front, the dissolution of the Lower House means a snap election will take place on October 22. After the reorganization of opposing parties promoted by Yuriko Koike, Tokyo’s metropolitan governor, who now leads the “Party of Hope”; the general election will decide whether Prime Minister Abe’s administration and Abenomics will continue.

By sector, the best performers for the week were Fishery, Agriculture & Forestry (+4.8%), Electric Power & Gas (+3.1%) and Foods (+2.2%). Asahi Holdings jumped 8.8% on expectations that a hike in beer prices will boost earnings. Kansai Electric Power rebounded and rose 5.1%.

In contrast, Mining (-2%) and Oil & Coal Products      (-1.6%) were weak. Oil refining companies Inpex Corporation (-2.3%) and JXTG Holdings (-2%) both lost ground after rising for two weeks in a row. Nissan Motor dropped 2.6% on news that the company will face around Yen 25bn in costs from recalling more than 1.2 million vehicles in Japan. 

  Emerging markets

Emerging markets bounced 3%. In China, the highlight was the PBoC’s decision to reduce its reserve requirement ratio for certain qualified banks, a move that was a positive surprise for the market. Moreover, China’s September Manufacturing PMI was higher than expected at 52.4.

In India, the Government announced a cut in central excise duty on petrol and diesel fuel to provide relief to consumers. We would prefer more government investments in infrastructure instead.

In Brazil, congress approved two important changes to Brazil’s political system in order to create more efficient coalitions, first that each party must have 1.5% of national votes to get seats in congress and, second, that presidential coalitions must be replicated in all other elections. In other Brazilian news, vehicle sales rose 24% in September (following a 17% rise in August).

In Mexico, Walmex reported a strong 10% increase in same-store sales, or better than consensus expectations. GAP also reported strong traffic of 7.8%, driven by domestic traffic.

In Russia, inflation fell to 3% in September, of below the CBR’s forecast. We expect the central bank to cut rates again in October. Sberbank reported record monthly results, with ROE at 22% despite higher provisioning.

We remain positive on emerging markets and expect further upward revisions in earnings estimates. 


Brent crude remained at a relatively high $56-58 and widened the gap with WTI (€51-52). OPEC’s output seems to have edged higher in September (+120,000 b/d compared to August according to Bloomberg) but the trend for US oil inventories is still favourable. 

Crude inventories increased after Hurricane Harvey but have since turned down. Interestingly, higher demand and a drop in imports have resulted in total crude, petrol and distillate inventories falling by 7 million barrels. Strong compliance with quotas since they were introduced in January is largely due to efforts by Saudi Arabia and Russia. As a result, the first visit of Saudi’s King Salman to Russia is an important step towards strengthening ties between the two countries. It looks as if Russia is increasingly assuming the role that the US used to have in the Middle East. And Vladimir Putin has mentioned the possibility of extending output cuts to the end of 2018. 

By rising more than 30% YTD, zinc has been a star performer so far this year. At $3,300/tonne or $1.5/lb, it is currently trading at its best level since August 2007. And it has not been hit by a surge in demand for metals like cobalt, lithium, copper, aluminium and nickel used to make electric vehicles. In the last two years, zinc has in fact gained on higher demand and the closure of end-of-life mines like Century and Lisheen. Unlike 2007, when much higher Chinese production disrupted the market, the fight against pollution now precludes this type of event. Nevertheless, such price levels might prompt companies to restart capacity. Glencore, which has some shut-down capacity, has just indicated that it wants to buy more of Peru’s Volcan Mineria, the 6th largest producer in the world. 

  Corporate debt



The Catalan referendum only had a limited impact and the uptrend was reinforced by upbeat macro data in Europe and two successful bond auctions in Spain on Thursday. But the referendum did impact Spanish issuers which underperformed at the beginning of the week as big selling hit companies with Catalan exposure. Selling abated on Thursday as doubts began to surface that separatists were all in favour of a declaration of independence. 

The new issues market was rather busy, particularly telecoms. Iliad (NR) issued a 7 year euro-denominated bond. Telecom Italia (Ba1/BB+) raised €1bn with a 10-year maturity. Altice (B1) raised €675m with senior bonds over 10.25 years. Elsewhere, Alain Afflelou (B/B2), a French optician’s chain, sold a 6-year maturity with fixed and floating tranches.

Tesco (Ba1/BB+) reported first half 2017/18 results that beat expectations. Sales rose 3.7%, operating margins were 2.7% and net earnings came in at £635m compared to a £91m loss in the first half of 2016/17. Alain Afflelou (B/B2) saw fourth quarter sales jump 16.5% while EBITDA rose 4.5%. Leverage improved to 0.3 times compared to 0.4 over the year.

Selecta Group (Caa1/B), which is owned by KKR, is to buy Italy’s Argenta which operates in the same automatic vending services sector. The deal should be completed in the first quarter of 2018 and should help Selecta extend its geographical spread to 16 countries. Intralot has agreed to sell its 50.05% stake in Intralot Caribbean Ventures Ltd to Zodiac International Investment $40m. The deal will raise Zodiac’s net leverage from 3.1 to 3.2 times. 


The primary market was quieter this week with only one deal in Europe. French multi-services group, Elis, a leader in the rental and maintenance of professional clothing and textile articles, issued a €400m zero coupon 6Y convertible to finance the acquisition of its UK peer, Berendsen. The next day, Eurazeo announced the sale of roughly half of its stake in Elis (4.56% of the latter’s share capital or 10 million shares) at a €22.01 per share.

Elsewhere, Belgian biotech company, Ablynx, rallied 30% this week on the back of the successful phase III results of its “Caplacizumab” treatment for a rare blood disorder; the company subsequently said it wanted to raise additional capital on the NASDAQ exchange. 

In Asia, China Construction Bank (the country’s second largest bank in China after ICBC) rose 6% after the People’s Bank of China cut its reserve requirement ratio.

In the US, during its 2017 Hardware Event, Google released “Google Clips”, a small lightweight camera which uses machine learning to automatically recognise and take pictures of subjects that are important to users; competitor GoPro slumped over 13% in response.

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